Published version in Economic and Political Weekly, May 5, 2001. Pp. 1541-1551

The Iconization of Chandrababu:

Sharing Sovereignty in India’s Federal Market Economy

Lloyd I. Rudolph

Susanne Hoeber Rudolph

University of Chicago

In the 1990s India moved from a command economy to a federal market economy. Under these new conditions, the states command a larger share of economic sovereignty than they did under the centrally planned economy. Whether they do well or badly economically depends more than before on what they do for themselves. States can act in ways that transform their initial economic situation; agency can modify structure. The surging growth of several poor states such as Rajasthan and Madhya Pradesh and the lagging growth of some rich states such as Punjab and Haryana suggests that poverty is not a trap and wealth no guarantee of continued success.

A necessary condition of a shift from a command to a federal market economy has been the economic liberalization policy launched in 1991 by the Narasimha Rao Congress government. Its sufficient condition, we argue, is the displacement of public investment by private investment as the engine of economic growth. The states have become the principal arena for private investment. Their competition for private investment has generated races to the bottom and to the top. States seem to be learning that it is better for them to forgo short term benefits and to adopt the mutually advantageous benefits of cooperation over the longer term. While the union government in New Delhi continues to loom large in the calculations of the states, it is transforming itself from the interventionist, tutelary state of a centrally planned economy and the permit-license raj to the regulatory state of a federal market economy. Its new role is to enforce fiscal discipline and to insure transparency and accountability in market and federal processes.

The New Imagined Economy

State Chief Ministers as Entrepreneurs

Ben Anderson gave us nations as “imagined communities,” Satish Deshpande gave us “imagined economies” and Tim Mitchell gave us the “national economy ...as a representation.”[1] Economies like nations can be understood as constructions, products of symbols and rhetoric as well as of theorists’ and practitioners’ concepts and categories. This paper starts with the contrast between how India’s economy was imagined in Jawaharlal Nehru’s day and how it has come to be imagined in the post-liberalization era, a centralized planned economy in the 1960s and a federal market economy [2] in the 1990s. Commonly understood as sites for “truck, barter and exchange” and getting the prices right, economies are also sites for symbolic dramas. In the symbolic politics of imagined economies, actors appear on a public stage. They speak from scripts that go beyond the positivist world of the professional economist, beyond the interests and preferences of capital and labor, consumers and producers, buyers and sellers. The federal market economy is populated by persons, places and relationships that constitute a coherent symbolic world.

In the 1950s and 1960s, the heyday of India’s five year plans, Prime Minister Jawaharlal Nehru cut a heroic figure as chairman of the Planning Commission that he put at the center of India’s industrial modernization. The Indian state would occupy the commanding heights of the economy. Nehru imagined big dams as temples for a powerful Indian nation. As the new millennium opens, the heroic age of centralized planning has become a fading memory. In the 1990s drama of economic liberalization state chief ministers play leading roles in India’s emergent federal market economy. They are seen on front pages, covers of news magazines and television screens, making and breaking coalition governments, welcoming foreign statesmen and investors, dealing with natural disasters and domestic violence. By March 1995 a perceptive Raja Chelliah could observe that

The relative spheres of activities of the two levels of the government have been thrown into a flux. The scope for real decentralization of economic power has been greatly increased and new vistas have opened up for creative and innovative activities by the sub-national level governments. [3]

By the end of the nineteen-nineties, state chief ministers became the marquee players in India’s federal market economy..

What has attracted media and policy attention in recent years, is the competition among the states for international attention and for domestic and foreign private investment. State chief ministers and their finance and industries secretaries to government went abroad, to the US, Western Europe, Japan, in search of private investors, including NRIs. As the new millennium opened India’s state capitals were attracting world leaders. Bill Gates and Bill Clinton in Hyderabad; Yoshiro Mori and Lee Peng in Bangalore. Clinton’s visit capped Andhra Chief Minister Chandrababu Naidu’s relentless efforts to be known as India’s most successful chief minister. From Dallas to Davos, he promoted his ambitious plans to transform Andhra Pradesh from a middle rank into a top rank state.[4] As leader of the Telugu Desam, one of a growing number of politically successful state parties, his efforts to promote and use information technology caught the national imagination. Earlier, counter-intuitively, it had been Jyoti Basu, the long serving Communist Chief Minister of Bengal, who took the lead in aggressively wooing job and revenue-generating capital.[5] By mid-2000 it was S. M. Krishna, Karnataka’s Congress chief minister, who appeared to be showing India its economic future. As Outlook put it, “Watch out, Naidu, S.M. Krishna is winning both panchayat polls and investors.”[6] In a world of federal competition in which some observers fear that a race to the bottom will make all the states worse off, Naidu and Krishna seem to be pursuing a race to the top that could make both better off..

The defining event that shifted attention to the states as arenas of economic decision-making occurred in 1993 when the Government of Maharashtra [GOM], India’s most industrialized state and home of India’s pre-eminent global city, Mumbai, began negotiations with the Texas energy giant, Enron, to build a $3.5 billion, 2000 megawatt power plant. The negotiations revealed the down as well as the up side of autonomy. States can seize the opportunity provided by the center’s diminished influence and resources to shape, for better or worse, their own fates. On December 8, 1993 the GOM and the Maharashtra State Electricity Board [MSEB].[7] signed a Power Purchase Agreement [PPA] with Dabhol Power Company, Enron’s India subsidiary, for the supply of about 2000MW of power. Described as “one of the largest contracts [civilian or military] in world history, and the single largest contract in [India’s] history,” it involved total energy investment of $3.5 billion over the life of the 20 year contract and, as estimated in 1996 on the basis of then prevailing indexed fuel costs, $34 billion over the same period to be paid by the MSEB to Dabhol/Enron..

What matters about this event for our story is that the Government of India [GOI] played at best a supporting role. In September 1994, it provided a sovereign counter-guarantee, a decision it came to regret. The GOI’s agents, e.g. a cabinet committee, the Finance Minister and the Central Electricity Authority [CEA] opposed the project. So did the World Bank. The GOI was cajoled, bullied and, for all practical purposes, pushed aside by the GOM. whose actions some have called shady, fool-hardy or illegal. More recent reflections indict the project and its failure to use competitive bidding instead of non-transparently negotiated “memos of understanding,” as “a perpetuation of old command-and-control habits” and an invitation to corruption rather than an instance of liberalization.[8] The actions were also potentially disastrous for the GOM and possibly for New Delhi, whose sovereign guarantee could make it financially liable if the GOM/MSEB finds it can’t pay its bills for the high cost electric power it is committed to purchase over the 20 years of the contract. [9]

As we write in 2001, eight years later, the financial and political ups and downs of the Enron deal continue to rivet the country’s attention on state level economic decision-making, although the initial optimism about attracting FDI has faded. Sharing economic sovereignty and economic de-centralization carry hazards as well as opportunities.

Our use of the term “federal market economy” is meant to draw attention to the fact that the new imagined economy evokes not only the decentralization of the market but also new patterns of shared sovereignty between the states and the center for economic and financial decision making. This increased sharing shifts India’s federal system well beyond the economic provisions of its formal constitution. Over the last decade it has become clear that if economic liberalization is to prevail, it is the state governments and their chief ministers that can and must break the bottlenecks holding back economic growth. Can they and their governments negotiate a path that avoids surrender to populist pressures and yet effectively responds to the inequalities generated by market solutions?[10]

If state chief ministers have become marquee players in the drama of the federal market economy, business leaders, economic regulators and a new breed of policy intellectuals can be found in conspicuous supportive roles. They overshadow the actors who in Nehru’s time shared the limelight focussed on the centrally planned economy, the able but now almost invisible deputy chairman of the Planning Commission in New Delhi’s Yojana Bhavan, K.C.Pant; the more visible Union Finance Minister, Yashwant Sinha, and other economic ministers and secretaries to government. As profit has come to be seen as a measure of productivity rather than as a symbol of greed and of anti-social gain,[11] the media increasingly depict India’s business men [there are still few women] as persons to respect and emulate. Kumaramangalam Birla, Ratan Tata, Dhirubhai Ambani[12], the young heirs of old business houses and the energetic builders of new; the IT entrepreneurs such as Wipro’s Azim Premji and Infosys’ S. Narayana Murti, are persons with whom state Chief Ministers do business, the entrepreneurs and managers who are said to make things happen and make the economy grow. As India moves from a centrally planned, state-dominated economy to a decentralized federal market economy, the economic views, philosophies of life and ways of living of India’s successful business men have come to attract some of the respect and admiration earlier enjoyed by the sentinels guarding the economy’s commanding heights.

Also over-shadowing the images of an increasingly obsolescent Nehruvian interventionist state are the administrators and policy intellectuals of India’s emergent “regulatory state,”[13] persons such as RBI [Reserve Bank of India] chairman Bimla Jalan, SEBI [Securities and Exchange Board of India] chair D. R. Mehta, former NCAER [National Council of Economic Research] Director General, Rakesh Mohan [now economic adviser to government], and CII’s [Confederation of Indian Industries] Director General, Tarun Das.

The Federal Market Economy: Causes and Reasons

Economic liberalization, the dismantling of the “permit-license raj” and an increasing reliance on markets, proved to be an enabling factor for the emergence of the federal market economy. The dismantling of controls provided a window of opportunity for enterprising state governments. But economic liberalization tells only part of the story of the emergence of a federal market economy. It was a necessary but not a sufficient condition. Equally important was the marked decline in public investment and, as a consequence, of the center’s financial leverage. Capital expenditure of both center and states as a ratio of total government expenditure declined from 31.2 percent in 1980-81 to 14.62 percent in 1995-96.[14] The central government no longer had the resources to finance large capital investments on its own. Further borrowing is constrained by large external and internal deficits[15] and by rising interest rates that increase the cost of carrying new debt and of rolling over old debts.[16] In 1998-99 interest payments as a ratio of the center’s revenue receipts were 52 percent.[17] The center’s deficit and the interest payments it entailed made it increasingly difficult for the center to help the states with investment funds or bail outs. The center’s gross assistance to states’ capital formation declined from 27 percent of the center’s revenue expenditure in 1990-91 to 12 percent in 1998-99.[18] This sharp decline proved to be an incentive for some states prepared to take advantage of the economic liberalization climate to pursue private investment. But economic forces were not alone in moving India from a centralized planned economy to a federal market economy. Political forces were equally important.

The movement from a command economy to a federal market economy is as much due to changes in the party system as it is to transformations of economic ideology and practice. Independent causal chains may have resulted in economic liberalization and the transformation of the party system during the 1990s but, once in place, the two phenomena began to interact in ways that proved mutually re-enforcing. The dominant party system of the Nehru-Gandhi era that enabled Congress party governments to engage in centralized planned investment gave way from 1989 onwards to a regionalized multi-party system and coalition governments in which state parties play a decisive role.

Since the ninth national election in 1989 returned a hung parliament, coalition governments have given ample scope to state parties. Atul Behari Vajpayee’s 1999 majority included 120 of 300 MPs from single state parties.[19] His NDA [National Democratic Alliance] government can be understood as a federalized coalition. Economic and political decentralization were working in tandem.

As shown in the accompanying charts,[20] between the 10th national election in 1991 when economic liberalization began and the 13th in 1999, the votes and seats of national parties have declined 10 per cent each, from 77 and 78 per cent to 67 and 68 percent respectively. The votes and seats of state parties, by contrast, have risen 10 and 13 per cent, from 17 and 16 per cent to 27 and 29 per cent respectively. Regional parties now play a pivotal role not only in a multiparty system and in the formation and conduct of coalition governments but also in the dynamics of the federal market system.

From Public to Private Investment in the States

Our story of the emergence of a federal market economy that gives states greatly increased scope to shape their economic fate begins with a paradox, the success of failure, or snatching a partial victory from the jaws of defeat. As we have already suggested, India’s deficits, both at the center and in the states, seemed to be mounting and intractable. Both center and states had bankrupted themselves by borrowing to pay for things they could not afford. It was this desperate condition, the foreign exchange crisis of 1991, which precipitated the reforms. Sachs, Varshney and Bajpai put it this way: